U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 000-23909
PINNACLE BANKSHARES CORPORATION
(Name of small business issuer in its charter)
VIRGINIA 54-1832714
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. BOX 29
ALTAVISTA, VIRGINIA 24517 24517-0029
---------------------------------------- ----------
(Address of principal executive offices) (ZIP CODE)
Issuer's telephone number (804) 369-3000
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $3.00
-----------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB.[X]
State issuer's revenues for its most recent fiscal year: $10,984,000
The aggregate market value of the voting stock held by nonaffiliates as
of February 9, 1999: $23,953,000
The number of shares outstanding of Common Stock as of March 10, 1999: 719,025
Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1998 is incorporated in Part II of this report which is
attached hereto as Exhibit 13. Portions of the Proxy Statement for the Company's
Annual Meeting of Shareholders to be held on April 13, 1999 are incorporated in
Part III of this report.
Transitional small business disclosure format: Yes [ ] No [x]
<PAGE>
PINNACLE BANKSHARES CORPORATION
1998 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business 3
General Development of Business
Competition
Supervision and Regulation
Employees
Item 2. Description of Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis or Plan of Operation 8
Item 7. Financial Statements 8
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 8
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 8
Item 10. Executive Compensation 8
Item 11. Security Ownership of Certain Beneficial Owners
and Management 8
Item 12. Certain Relationships and Related Transactions 8
Item 13. Exhibits and Reports on Form 8-K 9
SIGNATURES
2
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Pinnacle Bankshares Corporation, a Virginia corporation (the "Company"),
was organized in 1997 and is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended. The Company is headquartered in
Altavista, Virginia. The Company conducts all of its business activities through
offices of its wholly-owned subsidiary bank, The First National Bank of
Altavista (the "Bank"). The Company exists primarily for the purpose of holding
the stock of its subsidiary, the Bank, and of such other subsidiaries as it may
acquire or establish. The Company's administrative offices are located at 622
Broad Street, Altavista, Virginia.
The Bank was organized as a national bank in 1908 and commenced its
general banking operations in December of that year, providing services to
commercial and agricultural businesses and individuals in the Altavista area.
With an emphasis on personal service, the Bank today offers a broad range of
commercial and retail banking products and services including checking, savings
and time deposits, individual retirement accounts, merchant bankcard processing,
residential and commercial mortgages, home equity loans, consumer installment
loans, agricultural loans, investment loans, small business loans, commercial
lines of credit and letters of credit.
The Bank serves a trade area consisting primarily of southern Campbell
County, northern Pittsylvania County and southeastern Bedford County from
facilities located in the Town of Altavista. In October, 1998, a mortgage loan
production office was opened in Forest, Virginia. The office was opened to
better serve the Lynchburg and northern Campbell County area.
The Bank owns two wholly-owned subsidiaries. FNB Property Corp., which
is incorporated under the laws of the Commonwealth of Virginia, was formed to
hold title to Bank premises real estate. First Properties, Inc., which is
incorporated under the laws of the Commonwealth of Virginia, was formed to hold
title to other real estate owned.
COMPETITION
In general, the banking business in central Virginia is highly
competitive with respect to both loans and deposits and is dominated by a number
of major banks which have offices operating throughout the state and in the
Company's market area. The Company actively competes for all types of deposits
and loans with other banks and with nonbank financial institutions, including
savings and loan associations, finance companies, credit unions, mortgage
companies, insurance companies and other lending institutions.
Institutions such as brokerage firms, credit card companies and even
retail establishments offer alternative investment vehicles such as money market
funds and traditional banking services. Other entities (both public and private)
seeking to raise capital through the issuance and sale of debt or equity
securities also represent a source of competition for the Company with respect
to acquisition of deposits. Among the advantages which the major banks have over
the Company are their ability to finance extensive advertising campaigns and to
allocate their investment assets to regions of highest yield and demand, and
over a more diverse geographic area. Although major banks have some competitive
advantages over small independent banks, the Bank has actively tried to make the
loss of local independent banks a competitive advantage by soliciting customers
who prefer the personal service offered by the Bank.
The Company does not have a dependency upon a single customer or
industry, the loss of which would have a material adverse effect. The Company
believes the prompt response to lending requests is a positive contributing
factor to the Company's competitive position in its area. The accessibility of
senior management to customers and local decision-making also distinguish the
Company from other financial institutions.
In order to compete with the other financial institutions in its primary
service area, the Company relies principally upon local promotional activities,
personal contact by its officers, directors, employees and stockholders and
specialized services that it offers to customers. The Company's promotional
activities emphasize the advantages of dealing with a local bank attuned to the
particular needs of the community.
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REGULATION AND SUPERVISION
The following discussion of statutes and regulations is only a summary
and does not purport to be complete. This discussion is qualified in its
entirety by reference to such statutes and regulations. No assurance can be
given that such statutes or regulations will not change in the future.
GENERAL. The Company is subject to the periodic reporting requirements
of the Securities and Exchange Act of 1934, as amended(the "Exchange Act"),
which include, but are not limited to, the filing of annual, quarterly and other
reports with the Securities and Exchange Commission (the "SEC").
The Company is a bank holding company within the meaning of the Bank
Holding Company Act, and is registered as such with and is subject to the
supervision of the Federal Reserve Bank of Richmond (the "FRB"). Generally, a
bank holding company is required to obtain the approval of the FRB before it may
acquire all or substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to such
acquisition of shares, the bank holding company would own or control more than
5% of the voting shares of such bank. The FRB's approval is also required for
the merger or consolidation of bank holding companies.
The Company is required to file reports with the FRB and provide such
additional information as the FRB may require. The FRB also has the authority to
examine the Company and the Bank, as well as any arrangements between the
Company and the Bank, with the cost of any such examination to be borne by the
Company.
Banking subsidiaries of bank holding companies are also subject to
certain restrictions imposed by Federal law in dealings with their holding
companies and other affiliates. Subject to certain restrictions set forth in the
Federal Reserve Act, a bank can loan or extend credit to an affiliate, purchase
or invest in the securities of an affiliate, purchase assets from an affiliate
or issue a guarantee, acceptance or letter of credit on behalf of an affiliate;
provided that the aggregate amount of the above transactions of a bank and its
subsidiaries does not exceed 10% of the capital stock and surplus of the bank on
a per affiliate basis or 20% of the capital stock and surplus of the bank on an
aggregate affiliate basis. In addition, such transactions must be on terms and
conditions that are consistent with safe and sound banking practices and, in
particular, a bank and its subsidiaries generally may not purchase from an
affiliate a low-quality asset, as defined in the Federal Reserve act. Such
restrictions also prevent a bank holding company and its other affiliates from
borrowing from a banking subsidiary of the bank holding company unless the loans
are secured by marketable collateral of designated amounts. Further, the Company
and its subsidiary are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit, sale or lease of property or
furnishing of services.
A bank holding company is prohibited from engaging in or acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company engaged in nonbanking activities. One of the principal exceptions to
this prohibition is for activities found by the FRB by order or regulation to be
so closely related to banking or managing or controlling banks as to be proper
incident thereto. In making these determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer advantages
to the public which outweigh possible adverse effects.
As a national bank, the Bank is subject to regulation, supervision and
regular examination by the Office of the Comptroller of the Currency
("Comptroller"). Each depositor's account with the Bank is insured by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum amount
permitted by law, which is currently $100,000 for each insured deposit. The Bank
is also subject to certain regulations promulgated by the FRB and applicable
provisions of Virginia law, insofar as they do not conflict with or are not
preempted by Federal banking law.
The regulations of the FDIC, the Comptroller and FRB govern most aspects
of the Company's business, including deposit reserve requirements, investments,
loans, certain check clearing activities, issuance of securities, payment of
dividends, branching, deposit interest rate ceilings and numerous other matters.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the Company's business is particularly susceptible to changes
in state and Federal legislation and regulations, which may have the effect of
increasing the cost of doing business, limiting
4
<PAGE>
permissible activities or increasing competition.
GOVERNMENTAL POLICIES AND LEGISLATION. Banking is a business that
depends primarily on rate differentials. In general, the difference between the
interest rates paid by the Company on its deposits and its other borrowings and
the interest rates received by the Company on loans extended to its customers
and securities held in its portfolio, comprise the major portion of the
Company's net revenues. These rates are highly sensitive to many factors that
are beyond the Company's control. Accordingly, the Company's growth and earnings
are subject to the influence of domestic and foreign economic conditions,
including inflation, recession and unemployment.
The commercial banking business is affected not only by general economic
conditions, but is also influenced by the monetary and fiscal policies of the
Federal government and the policies of regulatory agencies, particularly the
FRB. The FRB implements national monetary policies (with objectives such as
curbing inflation and combating recession) by its open-market operations in U.S.
Government securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
FRB in these areas influence the growth of bank loans, investments and deposits,
and also affect interest rates charged on loans and paid on deposits. The nature
and impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of bank holding companies, banks and other financial
institutions are frequently made in Congress, in the Virginia Legislature and
before various bank holding company and bank regulatory agencies. The likelihood
of any major changes and the impact such changes might have are impossible to
predict. Certain of the potentially significant changes which have been enacted
recently by Congress or various regulatory or professional agencies are
discussed below.
CAPITAL REQUIREMENTS. The FRB, the Comptroller and the FDIC have adopted
risk- based capital adequacy guidelines for bank holding companies and banks.
The risk-based capital adequacy guidelines establish a risk-based capital ratio
based on the overall risk of the entity determined by (I) assigning weighted
risks to each balance sheet asset and certain off-balance sheet commitments and
(II) adding up all of the weighted risks of all assets and includable
off-balance sheet commitments to obtain the total risk. The guidelines generally
require banks to maintain a total qualifying capital to weighted risk assets
level of 8% (the "Risk-based Capital Ratio"). Of the total 8%, at least 4% of
the total qualifying capital to weighted risk assets (the "Tier 1 Risk-based
Capital Ratio") must be Tier 1 or core capital consisting primarily of equity
stock. Tier 2 capital, which is to make up the remainder of total capital,
consists of (I) loan loss allowance, up to 1.25% of weighted risk assets (II)
mandatory convertible debentures and (III) other forms of capital. Qualified
preferred capital stock may be considered core capital up to 25% of all core
capital elements.
The FRB, the Comptroller and the FDIC have adopted leverage requirements
that apply in addition to the risk-based capital requirements. Under these
requirements, bank holding companies and bank are required to maintain core
capital of at least 3% of their assets (the "Leverage Ratio"). However, an
institution may be required to maintain core capital of at least 4% or 5%, or
possibly higher, depending upon the activities, risks, rate of growth, and other
factors deemed material by regulatory authorities. As of December 31, 1997, the
Company and Bank both met all applicable capital requirements imposed by
regulation. See "Item 6. Management's Discussion and Analysis--Capital
Resources."
DIVIDENDS. There are regulatory restrictions on dividend payments by
both the Bank and the Company that may affect the Company's ability to pay
dividends on its Common Stock. See "Item 5. Market for Common Equity and Related
Stockholder Matters."
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. On
December 19, 1991, President Bush signed into law the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FDICIA is an omnibus banking
reform bill which added new regulation and made changes in existing regulation
of the operations, procedures and regulatory reporting of insured institutions,
bank holding companies and affiliates.
5
<PAGE>
Among other things, FDICIA establishes five capital categories applicable to
insured institutions, each with specific regulatory consequences. If the
appropriate Federal banking agency determines, after notice and an opportunity
for hearing, that an insured institution is in an unsafe or unsound condition,
it may reclassify the institution to the next lower capital category (other than
critically undercapitalized) and require the submission of a plan to correct the
unsafe or unsound condition. The Comptroller has issued regulations (the "Prompt
Corrective Action Regulation") to implement these provisions. Under the
regulations, the categories are:
a. Well Capitalized -- The institution exceeds the required minimum
level for each relevant capital measure. A well capitalized institution is one
(I) having a Risk- based Capital Ratio of 10% or greater, (II) having a Tier 1
Risk-based Capital Ratio of 6% or greater, (III) having a Leverage Ratio of 5%
or greater and (IV) not being subject to any order or written directive to meet
and maintain a specific capital level for any capital measure.
b. Adequately Capitalized -- The institution meets the required minimum
level for each relevant capital measure. No capital distribution may be made
that would result in the institution becoming undercapitalized. An adequately
capitalized institution is one (I) having a Risk-based Capital Ratio of 8% or
greater, (II) having a Tier 1 Risk- based Capital Ratio of less than 4% or (III)
having a Leverage Ratio of 4% or greater or a Leverage Ratio of 3% or greater if
the institution is rated composite 1 under the CAMEL rating system.
c. Undercapitalized -- The institution fails to meet the required
minimum level for any relevant capital measure. An undercapitalized institution
is one (I) having a Risk-based Capital Ratio of less than 8% or (II) having a
Tier 1 Risk-based Capital Ratio of less than 4% or (III) having a Leverage Ratio
of less than 4%, or if the institution is rated a composite 1 under the CAMEL
rating system, a Leverage Ratio of less than 3%.
The appropriate Federal banking agency must closely monitor an
undercapitalized institution and the institution must submit an acceptable
capital restoration plan. Each company having control over the undercapitalized
institution must provide a limited guarantee that the institution will comply
with its capital restoration plan. Except under limited circumstances consistent
with an accepted capital restoration plan, an undercapitalized institution may
not grow. An undercapitalized institution may not acquire another institution,
establish additional branch offices or engage in any new line of business unless
determined by the appropriate Federal banking agency to be consistent with an
accepted capital restoration plan or the FDIC determines that the proposed
action will further the purpose of prompt corrective action. The appropriate
Federal banking agency may take any action authorized for a significantly
undercapitalized institution if an undercapitalized institution fails to submit
an acceptable capital restoration plan or fails in any material respect to
implement a plan accepted by the agency.
An insured depository institution may not pay a management fee to a bank
holding company controlling that institution or any other person having control
of the institution if, after making the payment, the institution, would be
undercapitalized. In addition, an institution cannot make a capital
distribution, such as a dividend or other distribution that is in substance a
distribution of capital to the owners of the institution if following such a
distribution the institution would be undercapitalized. Thus, if payment of such
a management fee or the making of such would cause the Bank to become
undercapitalized, it could not pay a management fee or dividend to the Company.
d. Significantly Undercapitalized -- The institution is significantly
below the required minimum level for any relevant capital measure. A
significantly undercapitalized institution is one (I) having a Risk-based
Capital Ratio of less than 6% or (II) having a Tier 1 Risk-based Capital Ratio
of less than 4% or (III) having a Leverage Ratio of less than 3%.
e. Critically Undercapitalized -- The institution fails to meet a
critical capital level set by the appropriate Federal banking agency. A
critically undercapitalized institution is one having a ratio of tangible equity
to total assets that is equal to or less than 2%.
As of December 31, 1998, the Company was considered "well capitalized"
and the Bank was considered "well capitalized." See "Item 6. Management's
Discussion and Analysis-- Capital Resources."
6
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An institution which is classified as adequately capitalized or higher
may not pay a management fee to its holding company or other controlling person
or make capital distributions which in either case, would cause it to be less
than adequately capitalized.
An institution which is less than adequately capitalized must adopt an
acceptable capital restoration plan, is subject to increased regulatory
oversight, and is increasingly restricted in the scope of its permissible
activities. A critically undercapitalized institution is subject to having a
receiver or conservator appointed to manage its affairs and for loss of its
charter to conduct banking activities.
DEPOSIT INSURANCE ASSESSMENTS. FDICIA also requires the FDIC to
implement a risk- based assessment system in which the insurance premium relates
to the probability that the deposit insurance fund will incur a loss and directs
the FDIC to set semi-annual assessments in an amount necessary to increase the
reserve ratio of the Bank Insurance Fund (the "BIF") to at least 1.25% of
insured deposits or a higher percentage as determined to be justified by the
FDIC
The FDIC has promulgated implementing regulations that base an
institution's risk category partly upon whether the institution is well
capitalized ("1"), adequately capitalized ("2") or less than adequately
capitalized ("3"), as defined under the Prompt Corrective Action Regulations
described above. In addition, each insured depository institution is assigned to
one of three "supervisory subgroups." Subgroup "A" institutions are financially
sound institutions with few minor weaknesses, subgroup "B" institutions
demonstrate weaknesses which, if not corrected, could result in significant
deterioration and subgroup "C" institutions are those as to which there is a
substantial probability that the FDIC will suffer a loss in connection with the
institution unless effective action is taken to correct the areas of weakness.
Based on the current capital levels the Company is categorized as a
well-capitalized institution.
EMPLOYEES
As of December 31, 1998, the Company had 51 full-time employees. The
Company's Management believes that its employee relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company's headquarters are located at 622 Broad Street in downtown
Altavista, Virginia, which is owned and occupied principally by the Bank.
The Vista Branch, located at 1301 N. Main Street in Altavista, Virginia,
consists of a single-story building owned by the Bank.
First National Mortgage, located at 17841 Forest Road in Forest,
Virginia, consists of a single-story building leased by the Bank.
The Bank completed a three-story addition to its main office in 1998.
The Bank, through FNB Property Corp., also owns property at 14580 Wards Road in
Campbell County for future expansion. The Company maintains comprehensive
general liability and casualty loss insurance covering its properties and
activities conducted in or about its properties. The Company believes such
insurance provides adequate protection for liabilities or losses which might
arise out of the ownership and use of such properties.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
nonmaterial proceedings arising in the ordinary course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
7
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The information contained on page 53 of the 1998 Annual Report to
Shareholders, under the caption, "Market for Common Equity and Related
Stockholders Matters", is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The information presented under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 4 through 21
of the 1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements of the Registrant and subsidiary
contained on pages 22 through 51 of the 1998 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Except as otherwise indicated, information called for by the following
items under Part III is contained in the Proxy Statement for the 1999 Annual
Meeting of Pinnacle Bankshares Corporation ("Proxy Statement") mailed to
Shareholders on or about March 12, 1999.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
In response to this item, Registrant hereby incorporates by references
the section entitled "Election of Directors," at page 2 thru 5 of the Proxy
Statement for the Annual Meeting of Stockholders to be held on April 13, 1999.
The Registrant hereby incorporates by reference the section entitled
"Officers-Pinnacle Bankshares Corporation," as set forth on page 52 of the 1998
Annual Report of the Shareholders. The Registrant hereby incorporates by
reference the Section 16(a) Beneficial Ownership Reporting Compliance at page 8
of the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION.
Information on Executive Compensation is contained on pages 6 and 7 of
the Proxy Statement and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information on Security Ownership of Certain Beneficial Owners and
Management is contained on pages 2 through 4 of the Proxy Statement and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information on Certain Relationships and Related Transactions is
contained on page 5 of the Proxy Statement and is incorporated herein by
reference.
8
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ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 13-1998 Annual Report to Shareholders (Such report except
to the extent incorporated herein by reference, is being
furnished for the information of the Commission only and is not
deemed to be filed as part of this report on Form 10-KSB.)
Exhibit 27-Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
Company's fiscal year ended December 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PINNACLE BANKSHARES CORPORATION
MARCH 19, 1999 /s/ Robert H. Gilliam, Jr.
- ----------------------- -------------------------------------------
Date Robert H. Gilliam Jr., President and
Chief Executive Officer
MARCH 19, 1999 /s/ Dawn P. Crusinberry
- ----------------------- -------------------------------------------
Date Dawn P. Crusinberry, Secretary,
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/A. Willard Arthur Director March 19, 1999
- --------------------------
A. Willard Arthur
/s/Alvah P. Bohannon, III Director March 19, 1999
- --------------------------
Alvah P. Bohannon, III
/s/James E. Burton, IV Director March 19, 1999
- --------------------------
James E. Burton, IV
/s/John P. Erb Director March 19, 1999
- --------------------------
John P. Erb
/s/Robert L. Finch Director March 19, 1999
- --------------------------
Robert L. Finch
/s/Robert H. Gilliam, Jr. President, Chief Executive March 19, 1999
- -------------------------- Officer and Director
Robert H. Gilliam, Jr.
/s/Carroll E. Shelton Vice President and Director March 19, 1999
- --------------------------
Carroll E. Shelton
/s/John L. Waller Director March 19, 1999
- --------------------------
John L. Waller
/s/R.B. Hancock, Jr. Director March 19, 1999
- --------------------------
R.B. Hancock, Jr.
/s/James P. Kent, Jr. Director March 19, 1999
- --------------------------
James P. Kent, Jr.
/s/Percy O. Moore Director March 19, 1999
- --------------------------
Percy O. Moore
/s/Herman P. Rogers, Jr. Director March 19, 1999
- --------------------------
Herman P. Rogers, Jr.
/s/Kenneth S. Tyler, Jr. Director March 19, 1999
- ------------------------
Kenneth S. Tyler, Jr.
10
Exhibit 13
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Annual Report
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Table of Contents
December 31, 1998 and 1997
Page
Selected Historical Consolidated Financial Information 1
President's Letter 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
Consolidated Balance Sheets 22
Consolidated Statements of Income and Comprehensive Income 23
Consolidated Statements of Changes in Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 27
Independent Auditors' Report 51
Directors and Officers 52
Shareholder Information 53
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Selected Historical Consolidated Financial Information
(In thousands, except ratios, share and per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income $ 5,210 5,228 4,749 4,388 4,595
Provision for loan losses 300 350 205 240 200
Noninterest income 513 406 378 192 340
Noninterest expenses 3,358 2,905 2,764 2,712 2,581
Income tax expense 548 662 573 438 626
Net income 1,517 1,717 1,585 1,190 1,528
Per Share Data (2):
Basic net income 2.11 2.39 2.20 1.66 2.13
Diluted net income 2.09 2.39 2.20 1.66 2.13
Cash dividends 0.70 0.67 0.59 0.56 0.51
Book value 21.06 19.53 17.60 16.28 14.18
Balance Sheet Data:
Assets 142,458 131,650 124,951 119,380 116,024
Loans, net of unearned income
and fees and allowance for
loan losses 90,532 86,816 79,842 75,484 73,063
Total investment securities 35,072 32,740 35,766 34,647 34,613
Deposits 125,187 115,533 111,204 106,678 104,952
Stockholders' equity 15,142 14,042 12,657 11,709 10,194
Basic average shares outstanding 719,025 719,025 719,025 719,025 719,025
Diluted average shares outstanding 724,285 719,578 719,025 719,025 719,025
Performance Ratios:
Return on average assets 1.12% 1.35% 1.30% 1.01% 1.29%
Return on average equity 10.40% 12.86% 13.01% 10.87% 15.46%
Dividend payout 33.18% 28.03% 26.93% 33.80% 24.14%
Asset Quality Ratios:
Allowance for loan losses to
total loans, net of unearned
income and fees 0.96% 0.85% 0.84% 0.82% 0.76%
Net chargeoffs to average loans,
net of unearned income and
fees 0.20% 0.33% 0.20% 0.24% 0.23%
Capital Ratios:
Leverage 10.66% 10.65% 10.14% 9.63% 8.89%
Risk-based:
Tier 1 capital 15.30% 15.40% 15.79% 15.06% 14.45%
Total capital 16.20% 16.24% 16.63% 15.88% 15.22%
Average equity to average assets 10.76% 10.50% 10.01% 9.27% 8.33%
</TABLE>
1
<PAGE>
TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:
The effect of competition on our business was more apparent in 1998 then ever
before. Many more firms are offering financial services today and the public is
constantly bombarded with more and varied forms of solicitation for business.
New banking entrants in our market in 1998 were very aggressive with their
pricing in an attempt to establish themselves through buying business. In order
to maintain our share of the market in 1998, our interest margins were
compressed to the extent that we were not able to increase our net interest
income in 1998 over that in 1997. With higher operating costs in 1998, our net
income for the year of $1,517,000 was 11.65% below net income for 1997. The
return on average assets for 1998 was 1.12% and the return on average equity was
10.40%.
The economy remained sound in 1998 and continued to produce good demand for
loans. While we were pleased with our volume of new loans written in 1998, our
net loans outstanding increased only 4.28% for the year to $90,532,000, as a
larger number of loans than usual were paid out in advance of maturity due to
refinancings. Much of the loan growth we did realize in 1998 occurred late in
the year and the return on this growth did not show in the income statement for
1998.
Deposit growth of $9,654,000, 8.36%, in 1998 was the largest in the last four
years. Year-end deposits were $125,187,000. Total assets as of December 31, 1998
were $142,458,000, a new high for the company. Average assets for 1998 amounted
to $135,687,000.
Stockholders' equity reached $15,142,000 at the end of 1998, an increase of
7.83% over 1997. The growth resulted from retained earnings after payment of
dividends. Your company continues to be a well-capitalized institution by all
regulatory standards. Cash dividends paid in 1998 were $.70 per share. 1998
marked the twenty-second consecutive year of an increase in cash dividend
payments.
Early in 1998, we made a significant commitment to enhancing and expanding our
mortgage lending capabilities. This commitment included an investment in
facilities, personnel and systems and contributed to our increased costs in
1998. In October, First National Mortgage opened a loan production office in the
high growth Forest/Bedford County market. We began seeing positive results from
our mortgage lending operations in the second half of 1998, but even then the
return did not cover our costs for the full year. We have established ourselves
as a player in what is also a highly competitive business and we have confidence
that First National Mortgage will make a positive contribution to the bottom
line of our company in 1999.
Our product line was expanded further in 1998 with the introduction of the First
National Visa Check Key Card. This product looks like a credit card but acts
like a check. The Visa Check Key Card accesses our own ATMs as well as ATMs
world-wide. The card is accepted anywhere Visa is accepted and results in a
debit being made to a First National checking account rather than an extension
of credit. There has been strong demand and broad acceptance of this new
product. The bank has implemented a receivables financing program, "Business
Manager", for small businesses in 1998 and has also established a program to
assist businesses with lease financing. All of these programs are sources of new
fee income for the bank.
2
<PAGE>
Currently, our primary focus is on the successful establishment of our new
Airport Branch located on Wards Road (U.S. Rt. 29) at the intersection of
Russell Woods Drive in northern Campbell County just south of the Lynchburg
Regional Airport. Construction is progressing nicely at this point and we
anticipate opening by June 1, 1999. We are very excited about what we consider
to be a prime site and the opportunities for business this location should
afford us. Knowledge of our branch plans has produced a positive response from
folks located in this new market area and we are looking forward to serving
their banking needs.
It should be recognized that establishment of the branch will generate a new
level of costs in 1999 that will take some period of time to cover through
profitable operation. We are optimistic that we can minimize this time by
attracting a generous volume of business in a short period of time.
Two new members were appointed to the Board of Directors of both Pinnacle
Bankshares and First National Bank in 1998. A. Willard Arthur and James E.
Burton, IV were added to these boards due to their business acumen and the fact
that they represent various constituencies to be served by the new Airport
Branch. Both gentlemen are already making solid contributions to our company and
we are pleased to have them with us in their new capacity. Mr. Arthur's and Mr.
Burton's continued membership on the board of Pinnacle Bankshares Corporation is
subject to election by the shareholders of Pinnacle Bankshares at the 1999
annual meeting.
In February 1999, we announced a Dividend Reinvestment Plan for Pinnacle
Bankshares. The plan will be effective beginning with the April 1999 dividend.
The early response to this plan has been favorable and we are pleased that so
many shareholders have elected to take advantage of this benefit to utilize
dividends to acquire additional shares in the company.
A variety of steps have been taken in 1998 to enhance the business of our
company. Prospects for the future are bright. In spite of the competitive nature
of our business, First National Bank has a niche in the market place as an
established community bank and will continue to produce positive returns for
shareholders. The efforts and contributions of our board, management and staff
to the success of our company are recognized and appreciated. Thanks are also
due to the shareholders of Pinnacle Bankshares for their ongoing support and
referral of business which is so important to us.
Robert H. Gilliam, Jr.
President and Chief Executive Officer
March 1, 1999
3
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
Management's Discussion and Analysis (Amounts in 000's)
The following is management's discussion and analysis of the financial condition
and results of operations of the Company as of and for the years ended December
31, 1998 and 1997. The discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
Overview
Total assets at December 31, 1998 were $142,458, up 8.21% from $131,650 at
December 31, 1997. The principal components of the Company's assets at the end
of the period were $35,072 in securities and $90,532 in net loans. During the
twelve-month period, gross loans increased 4.25% or $3,740. The Company's
lending activities are a principal source of income.
Total liabilities at December 31, 1998 were $127,316, up from $117,608 at
December 31, 1997, with the increase reflective of a rise in total deposits of
$9,654 or 8.36%. Noninterest-bearing demand deposits increased $1,469 or 15.42%
and represented 8.78% of total deposits. The Company's deposits are provided by
individuals and businesses located within the communities served.
Total stockholders' equity at December 31, 1998 was $15,142. At December 31,
1997, total stockholders' equity was $14,042.
The Company had net income of $1,517 for the year ended December 31, 1998,
compared with net income of $1,717 for the year ended December 31, 1997, a
decrease of 11.65%. Higher noninterest expenses due to the main office addition
and increased staffing in mortgage lending contributed substantially to the
decrease in net earnings.
Profitability as measured by the Company's return on average assets (ROA) was
1.12% in 1998, down from 1.35% in 1997. Another key indicator of performance,
the return on average equity (ROE) for 1998 was 10.40%, compared to 12.86% for
1997.
Results of Operations
Net Interest Income. Net interest income represents the principal source of
earnings for the Company. Net interest income is the amount by which interest
and fees generated from loans, securities and other earning assets exceed the
expense associated with funding those assets. Changes in the volume and mix of
earning assets and interest-bearing liabilities, as well as their respective
yields and rates, have a significant impact on the level of net interest income.
Changes in the interest rate environment and the Company's cost of funds also
affected net interest income.
The net interest margin decreased from 4.47% for the year ended December 31,
1997, to 4.20% for the year ending December 31, 1998. Net interest income was
$5,402 for the year ended December 31, 1998 and is attributable to interest
income from loans and securities exceeding the cost associated with interest
paid on deposits. The decrease in the interest rate spread is a result of the
falling interest rate environment and assets repricing at lower rates faster
than corresponding interest-bearing liabilities.
4
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
The following table presents the major categories of interest-earning assets,
interest-earning liabilities and stockholders' equity with corresponding average
balances, related interest income or expense and resulting yield and rates for
the period indicated.
<TABLE>
<CAPTION>
ANALYSIS OF NET INTEREST INCOME
Years Ended December 31,
----------------------------------------------------------------------------------
1998 1997
--------------------------------------- ----------------------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Assets Balance Expense Paid Balance Expense Paid
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans(2)(3) $ 87,057 8,011 9.20% 83,987 7,838 9.33%
Investment securities:
Taxable 22,701 1,496 6.59% 24,409 1,632 6.69%
Tax exempt (4) 11,476 758 6.61% 10,044 694 6.91%
Interest-earning deposits 48 3 6.25% 31 2 6.45%
Federal funds sold 7,425 395 5.32% 2,479 134 5.41%
----------- ----------- ------------ ------------
Total interest-earning
assets 128,707 10,663 8.29% 120,950 10,300 8.52%
Other assets:
Reserve for loan losses (811) (712)
Cash and due from banks 2,682 2,739
Other assets, net 5,109 4,153
----------- ------------
Total assets $ 135,687 $ 127,130
=========== ============
Liabilities and
Stockholders' Equity
Interest-bearing liabilities:
Savings and NOW 37,733 1,137 3.01% 37,113 1,123 3.02%
Time 71,130 4,065 5.71% 65,970 3,766 5.71%
Other borrowings 960 59 6.14% 121 7 5.79%
----------- ----------- ------------ ------------
Total interest-bearing
liabilities 109,823 5,261 4.79% 103,204 4,896 4.74%
Noninterest-bearing liabilities:
Demand deposits 10,160 9,485
Other liabilities 1,296 1,146
----------- ------------
Total liabilities 121,279 113,835
Stockholders' equity 14,408 13,295
----------- ------------
Total liabilities and
stockholders' equity $ 135,687 127,130
=========== ----------- ============ ------------
Net interest income $ 5,402 $ 5,404
=========== ============
Net interest margin(5) 4.20% 4.47%
=========== ============
</TABLE>
5
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
- ---------------------------
(1) Averages are daily averages.
(2) Loan interest income includes late charges and accretion of loan fees of
$270 and $234 for the years 1998 and 1997, respectively.
(3) For the purpose of these computations, nonaccrual loans are included in
average loans.
(4) Tax-exempt income from investment securities is presented on a
tax-equivalent basis assuming a 34 percent federal tax rate for 1998 and
1997.
(5) The net interest margin is calculated by dividing net interest income by
average total earning assets.
As discussed above, the Company's net interest income is affected by the change
in the amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as "volume change," as well as by changes in yields
earned on interest-earning assets and rates paid on deposits and other borrowed
funds, referred to as "rate change." The following table presents, for the
periods indicated, a summary of changes in interest income and interest expense
for the major categories of interest-earning assets and interest-bearing
liabilities and the amounts of change attributable to variations in volumes and
rates.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
Years Ended December 31,
--------------------------------------------------------------------------
1998 compared to 1997 1997 compared to 1996
Increase (Decrease) Increase (Decrease)
------------------------------------ ------------------------------------
Volume Rate Net Volume Rate Net
---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on interest-earning assets:
Loans(1) $ 280 (107) 173 639 71 710
Investment securities:
Taxable (112) (24) (136) (50) 25 (25)
Tax exempt 92 (28) 64 (35) (17) (52)
Interest-earning deposits 1 -- 1 -- 2 2
Federal funds sold 263 (2) 261 (36) 3 (33)
---------- ----------- ----------- ---------- ---------- -----------
Total interest earned on interest-
earning assets 524 (161) 363 518 84 602
---------- ----------- ----------- ---------- ---------- -----------
Interest paid on interest-bearing liabilities:
Savings and NOW 18 (4) 14 13 (3) 10
Time 299 -- 299 180 (61) 119
Other borrowings 52 -- 52 -- 7 7
---------- ----------- ----------- ---------- ---------- -----------
Total interest paid on interest-
bearing liabilities 369 (4) 365 193 (57) 136
========== =========== =========== ========== ========== ===========
Change in net interest income $ 155 (157) (2) 325 141 466
========== =========== =========== ========== ========== ===========
</TABLE>
- ---------------------------
(1) Nonaccrual loans are included in the loan totals used in the calculation
of this table.
6
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
Provision for Loan Losses. The provision for loan losses is based upon the
Company's evaluation of the quality of the loan portfolio, total outstanding and
committed loans, previous loan losses and current and anticipated economic
conditions. The amount of the provision for loan losses is a charge against
earnings. Actual loan losses are charges against the allowance for loan losses.
The Company's allowance for loan losses is typically maintained at a level
deemed adequate to provide for known and inherent losses in the loan portfolio.
No assurance can be given that unforeseen adverse economic conditions or other
circumstances will not result in increased provisions in the future.
Additionally, regulatory examiners may require the Company to recognize
additions to the allowance based upon their judgment about information available
to them at the time of their examinations.
The provisions for loan losses for the years ended December 31, 1998 and 1997
were $300 and $350, respectively. The decrease in 1998 was a result of a
decrease in the amount of actual net loan losses.
The allowance for loan losses was $877 or .96% of gross loans as of December 31,
1998 as compared to $747 or .85% of total loans, net of unearned income and
fees, as of December 31, 1997. See "Allowance for Loan Losses" for further
discussion.
Noninterest Income. Total noninterest income for the year ended December 31,
1998 increased $107 or 26.35% to $513 from $406 in 1997. The Company's principal
source of noninterest income is service charges and fees on deposit accounts,
particularly transaction accounts, and fees from other bank products. The
majority of the increase in 1998 is attributed to income generated from fees on
various loan and deposit products.
Noninterest Expense. Total noninterest expense for the year ended December 31,
1998 increased $453 or 15.59% to $3,358 from $2,905 for 1997. The increase in
noninterest expense is attributed to the effect of overall growth of the Company
on personnel expenses, fixed asset costs and other operating expenses. One
component of the increase in other operating expenses occurred in advertising
expenses, which increased $31 primarily due to promotions for the new mortgage
production office and a new debit card program.
Income Taxes. Applicable income taxes on 1998 earnings amounted to $548,
resulting in an effective tax rate of 26.09% compared to $662, or 27.8%, in
1997. Effective tax rates are comparable with the overall decline attributable
to an increase in tax exempt income in 1998 as compared to 1997.
Liquidity and Asset/Liability Management
Effective asset/liability management includes maintaining adequate liquidity and
minimizing the impact of future interest rate changes on net interest income.
The responsibility for monitoring the Company's liquidity and the sensitivity of
its interest-earning assets and interest-bearing liabilities lies with the Asset
Liability Committee of the Bank which meets at least quarterly to review
liquidity and the adequacy of funding sources.
Cash Flows. The Company derives cash flows from its operating, investing and
financing activities. Cash flows of the Company are primarily used to fund loans
and securities and are provided by the deposits and borrowings of the Company.
7
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
The Company's operating activities for the year ended December 31, 1998 resulted
in net cash provided of $1,748 primarily due to net earnings of $1,517 adjusted
for depreciation of $240, a provision for loan losses of $300, and increases in
other liabilities and accrued interest payable of $101 and $53, respectively,
and partially offset by an increase in other assets of $147, an increase in
accrued income receivable of $67, a provision for deferred income taxes of $166,
and amortization of net unearned fees of $133. The Company's operating
activities for the year ended December 31, 1997 resulted in net cash provided of
$2,403 primarily due to net earnings of $1,717 adjusted for depreciation of
$213, a provision for loan losses of $350, a decrease in other assets of $121
and a provision for deferred income taxes of $74 partially offset by
amortization of unearned fees of $102.
The Company's cash flows from investing activities used net cash of $6,809 for
the year ended December 31, 1998 compared to net cash used of $6,303 for the
same period in 1997. In 1998, cash was used primarily to fund loans in the
amount of $4,203 and for purchases of bank premises and equipment of $1,380. In
1997, cash was used primarily to fund loans in the amount of $7,576 and for
investment in bank premises and equipment and development costs associated with
the new branch construction of $2,155. Investing activities representing net
proceeds from investment securities purchases, maturities and calls generated
cash outflows of $2,223 in 1998 and cash inflows of $3,243 in 1997.
Net cash provided by financing activities for the year ended December 31, 1998
was $9,052 as compared to $4,847 for the year ended December 31, 1997. The net
increase in deposits was $9,654 and $4,329 in 1998 and 1997, respectively. The
Company borrowed $1,000 during 1997 under a note payable to the Federal Home
Loan Bank and made repayments of $100 during 1998. Cash dividends paid to
stockholders were $502 and $482 in 1998 and 1997, respectively.
Liquidity. Liquidity measures the ability of the Company to meet its maturing
obligations and existing commitments, to withstand fluctuations in deposit
levels, to fund its operations, and to provide for customers' credit needs.
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds from alternative funding sources.
The Company's liquidity is provided by cash and due from banks, federal funds
sold, investments available for sale, managing investment maturities,
interest-earning deposits in other financial institutions and loan repayments.
The Company's ratio of liquid assets to deposits and short-term borrowings was
23.05% as of December 31, 1998 as compared to 23.06% as of December 31, 1997.
The Company sells excess funds as overnight federal funds sold to provide an
immediate source of liquidity. Federal funds sold as of December 31, 1998 was
$7,359 as compared to $3,387 as of December 31, 1997.
The level of deposits may fluctuate significantly due to seasonal business
cycles of depository customers. Similarly, the level of demand for loans may
vary significantly and at any given time may increase or decrease substantially.
However, unlike the level of deposits, management has more direct control over
lending activities and maintains the level of those activities according to the
amounts of available funds.
8
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
As a result of the Company's management of liquid assets and the ability to
generate liquidity through alternative funding sources, management believes that
the Company maintains overall liquidity which is sufficient to satisfy its
depositors' requirements and to meet customers' credit needs. Additional sources
of liquidity available to the Company include its capacity to borrow funds
through correspondent banks and the Federal Home Loan Bank.
Interest Rates
While no single measure can completely identify the impact of changes in
interest rates on net interest income, one gauge of interest rate sensitivity is
to measure, over a variety of time periods, the differences in the amounts of
the Company's rate-sensitive assets and rate-sensitive liabilities. These
differences or "gaps" provide an indication of the extent to which net interest
income may be affected by future changes in interest rates. A "positive gap"
exists when rate-sensitive assets exceed rate-sensitive liabilities and
indicates that a greater volume of assets than liabilities will reprice during a
given period. This mismatch may enhance earnings in a rising interest rate
environment and may inhibit earnings in a declining interest rate environment
Conversely, when rate-sensitive liabilities exceed rate-sensitive assets,
referred to as a "negative gap," it indicates that a greater volume of
liabilities than assets will reprice during the period. In this case, a rising
interest rate environment may inhibit earnings and a declining interest rate
environment may enhance earnings. The cumulative one-year gap as of December 31,
1998 was $(30,150), representing 25.37% of total assets. This negative gap falls
within the parameters set by the Company.
The following table illustrates the Company's interest rate sensitivity gap
position at December 31, 1998.
<TABLE>
<CAPTION>
REPRICING GAP POSITION
Repricing Period at December 31, 1998
-------------------------------------------------------------
1 Year 1-3 Years 3-5 Years 5-15 Years
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSET/(LIABILITY):
Cumulative interest
rate sensitivity gap (30,150) (35,947) (17,266) 13,974
</TABLE>
As of December 31, 1998, the Company was liability-sensitive in periods up to
five years and asset-sensitive beyond five years. The foregoing table does not
necessarily indicate the impact of general interest rate movements on the
Company's net interest yield, because the repricing of various categories of
assets and liabilities is discretionary and is subject to competition and other
pressures. As a result, various assets and liabilities indicated as repricing
within the same period may in fact price at different times and at different
rate levels. Management attempts to mitigate the impact of changing interest
rates in several ways, one of which is to manage its interest rate-sensitivity
gap. At December 31, 1998, all fluctuations fell within Company policy
limitations. In addition to managing its asset/liability position, the Company
has taken steps to mitigate the impact of changing interest rates by generating
noninterest income through service charges, and offering products which are not
interest rate-sensitive.
Effects of Inflation
9
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
The effect of changing prices on financial institutions is typically different
from other industries as the Company's assets and liabilities are monetary in
nature. Interest rates are significantly impacted by inflation, but neither the
timing nor the magnitude of the changes are directly related to price level
indices. Impacts of inflation on interest rates, loan demand and deposits are
reflected in the financial statements.
Investment Portfolio
The Company's investment portfolio is used primarily for investment income and
secondarily for liquidity purposes. The Company invests funds not used for
capital expenditures or lending purposes in securities of the U.S. Government
and its agencies, mortgage-backed securities, and taxable and tax-exempt
municipal bonds or certificates of deposit. Obligations of the U.S. Government
and its agencies include treasury notes and callable or noncallable agency
bonds. Mortgage-backed securities include collateralized mortgage obligations
and mortgage-backed security pools. The collateralized mortgage obligations in
the Company's investment securities portfolio are "low risk" as defined by
applicable bank regulations and are diverse as to collateral and interest rates
of the underlying mortgages. The mortgage-backed securities are diverse as to
interest rates and guarantors. The Company does not invest in derivatives or
other high-risk type securities.
Investment securities available-for-sale as of December 31, 1998 were $20,352, a
decrease of $1,687 or 7.65% from $22,039 as of December 31, 1997. The decrease
was primarily due to maturities and calls of $11,620. Investment securities
held-to-maturity increased to $14,720 as of December 31, 1998 from $10,701 as of
December 31, 1997, an increase of $4,019 or 37.56%.
The table below presents the composition of the Company's investment portfolios
as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997
-------------------------- ---------------------------
Amortized Fair Amortized Fair
Available-for-Sale Costs Values Costs Values
- --------------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 10,996 11,127 10,844 10,880
Obligations of states and political
subdivisions 4,199 4,343 3,891 4,012
Mortgage-backed securities -
Government 4,208 4,267 6,223 6,258
Corporate securities 504 508 764 782
Other securities 107 107 107 107
------------ ----------- ------------ ------------
Total available-for-sale $ 20,014 20,352 21,829 22,039
============ =========== ============ ============
</TABLE>
10
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997
-------------------------- ---------------------------
Amortized Fair Amortized Fair
Held-to-Maturity Costs Values Costs Values
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 2,411 2,427 3,142 3,155
Obligations of states and political
subdivisions 12,302 12,650 7,548 7,732
Mortgage-backed securities -
Private 7 7 11 11
------------ ----------- ------------ ------------
Total held-to-maturity $ 14,720 15,084 10,701 10,898
============ =========== ============ ============
</TABLE>
The following table presents the maturity distribution based on fair value and
amortized cost of the investment portfolios as of the dates indicated.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION
December 31, 1998
---------------------------------------------
Amortized Fair
Available-for-Sale Costs Values Yield
- --------------------- ------------- ------------- -------------
<S> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations:
Within one year $ -- -- --
After one but within five years 5,493 5,544 5.73%
After five years through ten years 5,503 5,583 6.53%
After ten years -- -- --
Obligations of states and subdivisions:
Within one year 265 267 6.11%
After one but within five years 1,285 1,323 4.93%
After five years through ten years 1,927 1,997 5.03%
After ten years 722 756 5.02%
Corporate securities:
Within one year 504 508 6.80%
Mortgage-backed securities -
Government 4,208 4,267 6.47%
Other securities(1) 107 107 52.37%
------------- -------------
Total available-for-sale $ 20,014 20,352
============= =============
</TABLE>
11
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION (Cont.)
December 31, 1998
---------------------------------------------
Amortized Fair
Held-to-Maturity Costs Values Yield
------------- ------------- -------------
<S> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations:
Within one year $ 1,698 1,710 6.32%
After five years through ten years 713 717 6.41%
Obligations of states and subdivisions:
Within one year 500 503 5.72%
After one but within five years 2,730 2,810 5.21%
After five years through ten years 6,719 6,892 5.14%
After ten years 2,353 2,445 5.25%
Mortgage-backed securities - private 7 7 5.73%
------------- -------------
Total held-to-maturity $ 14,720 15,084
============= =============
</TABLE>
- ---------------------------
(1) Equity securities assume a life greater than ten years.
Loan Portfolio
The Company's net loans were $90,532 as of December 31, 1998, an increase of
$3,716 or 4.28% from $86,816 as of December 31, 1997.
The Company's ratio of net loans to total deposits was 72.32% as of December 31,
1998. Typically, the Company maintains a ratio of loans to deposits of between
70% and 85%. The loan portfolio primarily consists of commercial, real estate
(including real estate term loans, construction loans and other loans secured by
real estate), and loans to individuals for household, family and other consumer
expenditures. However, the Company adjusts its mix of lending and the terms of
its loan programs according to market conditions and other factors. The
Company's loans are typically made to businesses and individuals located within
the Company's market area, most of whom have account relationships with the
Bank. There is no concentration of loans exceeding 10% of total loans which is
not disclosed in the categories presented below. The Company has not made any
loans to any foreign entities including governments, banks, businesses or
individuals. Commercial and construction loans in the Company's portfolio are
primarily variable rate loans and have little interest rate risk.
The table below presents the composition of the Company's loan portfolio as of
the dates indicated.
12
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
<TABLE>
<CAPTION>
LOAN PORTFOLIO
December 31,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Real estate loans:
Residential $ 34,324 37,557
Other 11,307 8,912
Loans to individuals for household, family
and other consumer expenditures 32,817 31,942
Commercial and industrial loans 12,890 8,714
All other loans 367 840
--------------- ---------------
Total loans, gross 91,705 87,965
Less unearned income and fees (296) (402)
--------------- ---------------
Loans, net of unearned income and fees 91,409 87,563
Less allowance for loan losses (877) (747)
--------------- ---------------
Loans, net $ 90,532 86,816
=============== ===============
</TABLE>
Commercial Loans. Commercial and industrial loans accounted for 14.06% of the
Company's loan portfolio as of December 31, 1998. Such loans are generally made
to provide operating lines of credit, to finance the purchase of inventory or
equipment, and for other business purposes. Commercial loans are primarily made
at rates that adjust with changes in the prevailing prime interest rate, are
generally made for a maximum term of five years (unless they are term loans),
and generally require interest payments to be made monthly. The creditworthiness
of the borrower is reviewed, analyzed and evaluated on a periodic basis. Most
commercial loans are collateralized with business assets such as accounts
receivable, inventory and equipment. Even with substantial collateralization
such as all the assets of the business and personal guarantees, commercial
lending involves considerable risk of loss in the event of a business downturn
or failure of the business.
Real Estate Loans. Real estate loans accounted for 49.76% of the Company's loan
portfolio as of December 31, 1998. The Company makes commercial and industrial
real estate term loans that are typically secured by a first deed of trust.
73.04% of the real estate loans were secured by 1-4 family residential
properties and .89% of total gross loans were construction loans. Real estate
lending involves risk elements when there is lack of timely payment and/or a
decline in the value of the collateral.
Installment Loans. Installment loans are represented by loans to individuals for
household, family and other consumer expenditures. Installment loans accounted
for 35.78% of the Company's loan portfolio as of December 31, 1998. Vehicle
financing involves the risk that collateral will decline in value faster than
the balance of the loan it secures.
13
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
Loan Maturity and Interest Rate Sensitivity. The following table presents loan
portfolio information related to maturity distribution of commercial and
industrial loans and real estate construction loans based on scheduled
repayments at December 31, 1998.
<TABLE>
<CAPTION>
LOAN MATURITY
Due Within Due One to Due After
One Year Five Years Five Years Total
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Commercial and industrial loans $ 4,073 6,896 1,921 12,890
Real estate - construction 635 182 -- 817
</TABLE>
The following table presents the interest rate sensitivity of commercial and
industrial loans and real estate construction loans maturing after one year as
of December 31, 1998.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
<S> <C>
Fixed interest rates $ 3,541
Variable interest rates 5,458
---------------
Total maturing after one year $ 8,999
===============
</TABLE>
Nonperforming Assets. Interest on loans is normally accrued from the date a
disbursement is made and recognized as income as it is accrued. Generally, the
Company reviews any loan on which payment has not been made for 90 days for
potential nonaccrual. The loan is examined and the collateral is reviewed to
determine loss potential. If the loan is placed on nonaccrual, any prior accrued
interest which remains unpaid is reversed. Loans on nonaccrual amounted to $45
and $38 as of December 31, 1998 and 1997, respectively. Interest income that
would have been earned on nonaccrual loans if they had been current in
accordance with their original terms and the recorded interest that was included
in income on these loans was not significant for 1998 and 1997. There were no
commitments to lend additional funds to customers whose loans were on nonaccrual
at December 31, 1998.
The following tables present information with respect to the Company's
nonperforming assets and accruing loans 90 days or more past due by type as of
the dates indicated.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
December 31,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Nonperforming loans:
Loans on nonaccrual - real estate $ 45 38
Other real estate owned (OREO) 48 151
--------------- ---------------
Total nonperforming assets $ 93 189
=============== ===============
</TABLE>
14
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
Nonperforming assets totaled $93 or .10% of total gross loans and OREO as of
December 31, 1998, as compared to $189 or .21% as of December 31, 1997. The
following table presents the balance of accruing loans 90 days or more past due
by type as of the dates indicated.
<TABLE>
<CAPTION>
ACCRUING LOANS 90 DAYS OR MORE
PAST DUE BY TYPE
December 31,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Loans 90 days or more past due by type:
Real estate loans $ 194 202
Loans to individuals 232 138
Commercial loans 22 32
--------------- ---------------
$ 448 372
=============== ===============
</TABLE>
Allowance for Loan Losses. The Company maintains an allowance for loan losses
which it considers adequate to cover the risk of losses in the loan portfolio.
The allowance is based upon management's ongoing evaluation of the quality of
the loan portfolio, total outstanding and committed loans, previous charges
against the allowance and current and anticipated economic conditions. The
allowance is also subject to regulatory examinations and determinations as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance. The Company's management believe that as of December
31, 1998, the allowance is adequate. The amount of the provision for loan losses
is a charge against earnings. Actual loan losses are charged against the
allowance for loan losses.
The provision for loan losses for the years ended December 31, 1998 and 1997 was
$300 and $350, respectively. The decrease in the provision during 1998 was due
to a decrease in the amount of actual net loan losses.
As of December 31, 1998, the allowance for loan losses totaled $877 or .96% of
total gross loans as compared with $747 or .84% of total loans as of December
31, 1997. Net charge-offs for the Company were $170 and $277 for the years ended
December 31, 1998 and 1997, respectively. The ratio of net loan charge-offs
during the period to average loans outstanding for the period was .20% and .33%
for the years ended December 31, 1998 and 1997, respectively. Management
evaluates the reasonableness of the allowance for loan losses on a quarterly
basis and adjusts the provision as deemed necessary.
15
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
The following table presents charged off loans, provisions for loan losses,
recoveries on loans previously charged off, allowance adjustments and the amount
of the allowance for the dates indicated.
<TABLE>
<CAPTION>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Years Ended
December 31,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Balance at beginning of year $ 747 674
Loan charge-offs:
Real estate loans:
Residential (15) (1)
Loans to individuals for household,
family and other consumer
expenditures (281) (373)
Commercial and industrial (7) (83)
--------------- ---------------
Total loan charge-offs (303) (457)
--------------- ---------------
Less recoveries:
Real estate loans:
Residential 3 1
Loans to individuals for household,
family and other consumer
expenditures 127 165
Commercial and industrial 3 14
-------------- ---------------
Total loan recoveries 133 180
--------------- ---------------
Net loan charge-offs (170) (277)
Provisions for loan losses 300 350
--------------- ---------------
Balance at end of year $ 877 747
=============== ===============
</TABLE>
The primary risk element considered by management with respect to each
installment and conventional real estate loan is lack of timely payment and the
value of the collateral. The primary risk elements with respect to real estate
construction loans are fluctuations in real estate values in the Company's
market areas, inaccurate estimates of construction costs, fluctuations in
interest rates, the availability of conventional financing, the demand for
housing in the Company's market area and general economic conditions. The
primary risk elements with respect to commercial loans are the financial
condition of the borrower, general economic conditions in the Company's market
area, the sufficiency of collateral, the timeliness of payment and, with respect
to adjustable rate loans, interest rate fluctuations. Management has a policy of
requesting and reviewing annual financial statements from its commercial loan
customers and periodically reviews the existence of collateral and its value.
Management also has a reporting system that monitors all past due loans and has
adopted policies to pursue its creditor's rights in order to preserve the
Company's position.
16
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
Loans are charged against the allowance when, in management's opinion, they are
deemed uncollectible, although the Bank continues to aggressively pursue
collection. Although management believes that the allowance for loan losses is
adequate to absorb losses as they arise, there can be no assurance that (i) the
Company will not sustain losses in any given period which could be substantial
in relation to the size of the allowance for loan losses, (ii), the Company's
level of nonperforming loans will not increase, (iii) the Company will not be
required to make significant additional provisions to its allowance for loan
losses, or (iv) the level of net charge-offs will not increase and possibly
exceed applicable reserves.
The following table presents the allocation of the allowance for loan losses as
of the dates indicated. Notwithstanding these allocations, the entire allowance
for loan losses is available to absorb charge-offs in any category of loans.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31, 1998 December 31, 1997
---------------------------------- -----------------------------------
Percent of Percent of
Allowance Loans in Each Allowance Loans in Each
for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C>
Real estate loans:
Residential $ 2 37.43% -- 42.70%
Other -- 12.33% -- 10.13%
Loans to individuals for households,
family and other consumer
expenditures 272 35.78% 198 36.31%
Commercial and industrial loans 169 14.06% 68 9.91%
All other loans -- .40% -- .95%
Unallocated 434 -- 481 --
================ =============== ================ ================
$ 877 100.00% 747 100.00%
================ =============== ================ ================
</TABLE>
Credit Risk Management. The risk of nonpayment of loans is an inherent aspect of
commercial banking. The degree of perceived risk is taken into account in
establishing the structure of, and interest rates and security for, specific
loans and various types of loans. The Company strives to minimize its credit
risk exposure by its credit underwriting standards and loan policies and
procedures. Management continually evaluates the credit risks of such loans and
believes it has provided adequately for the credit risks associated with these
loans. The Company has implemented and expects to continue to implement and
update new policies and procedures to maintain its credit risk management
systems.
Premises and Equipment
The Company's premises and equipment grew 12.32%, basically due to completion of
an addition to the main office facility and land improvements relating to a new
branch to be built in Campbell County.
Deposits
17
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
Average deposits were $119,023 for the year ended December 31, 1998, an increase
of $6,455 or 5.73% from $112,568 of average deposits for the year ended December
31, 1997. As of December 31, 1998, total deposits were $125,187, representing an
increase of $9,654 or 8.36% from $115,533 in total deposits as of December 31,
1997. The increase in deposits during 1998 was primarily due to increases in
previously existing accounts as well as new accounts opened as a result of
relationship changes and new products offered.
For the year ended December 31, 1998, average demand deposits were $10,160 or
8.54% of average deposits. For the year ended December 31, 1997, average demand
deposits were $9,485 or 8.43% of average deposits. Average interest-bearing
deposits were $108,863 for the year ended December 31, 1998, representing an
increase of $5,780 or 5.61% over the $103,083 in average interest-bearing
deposits for the year ended December 31, 1997.
The levels of noninterest-bearing demand deposits (including retail accounts)
are influenced by such factors as customer service, service charges and the
availability of banking services. No assurance can be given that the Company
will be able to maintain its current level of noninterest-bearing deposits.
Competition from other banks and thrift institutions as well as money market
funds, some of which offer interest rates substantially higher than the Company,
makes it difficult for the Company to maintain the current level of
noninterest-bearing deposits. Management continually works to implement pricing
and marketing strategies designed to control the cost of interest-bearing
deposits and to maintain a stable deposit mix.
The following table presents the Company's average deposits and the average rate
paid for each category of deposits for the period indicated.
<TABLE>
<CAPTION>
AVERAGE DEPOSIT INFORMATION
Year Ended Year Ended
December 31, 1998 December 31, 1997
-------------------------------- --------------------------------
Average Average Average Average
Amount of Rate Amount of Rate
Deposits Paid Deposits Paid
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand
deposits $ 10,160 N/A 9,485 N/A
Interest-bearing demand deposits 14,802 2.93% 13,408 2.92%
Savings deposits 22,931 3.07% 23,705 3.08%
Certificates of deposit:
Under $100,000 59,418 5.72% 55,891 5.70%
$100,000 or more 11,712 5.70% 10,079 5.78%
--------------- --------------
Total certificates of deposit 71,130 65,970
--------------- --------------
Total average deposits $ 119,023 112,568
=============== ==============
</TABLE>
The following table presents the maturity schedule of certificates of deposit of
$100,000 or more as of December 31, 1998.
18
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
CERTIFICATES OF DEPOSIT OVER $100,000
Three months or less $ 3,264
Over three through six months 949
Over six through 12 months 5,291
Over 12 months 2,580
-----------------
Total $ 12,084
=================
Financial Ratios
The following table presents certain financial ratios for the period indicated.
RETURN ON EQUITY AND ASSETS
Years Ended
December 31,
--------------------------------
1998 1997
--------------- ---------------
Return on average assets 1.12% 1.35%
Return on average equity 10.40% 12.86%
Dividend payout ratio 33.18% 28.03%
Average equity to average assets 10.76% 10.50%
Capital Resources
The Company's financial position at December 31, 1998 reflects liquidity and
capital levels currently adequate to fund anticipated future business expansion.
Capital ratios are well in excess of required regulatory minimums for a
well-capitalized institution. The assessment of capital adequacy depends on a
number of factors such as asset quality, liquidity, earnings performance, and
changing competitive conditions and economic forces. The adequacy of the
Company's capital is reviewed by management on an ongoing basis. Management
seeks to maintain a capital structure that will assure an adequate level of
capital to support anticipated asset growth and to absorb potential losses.
The Company's capital position continues to exceed regulatory requirements. The
primary indicators relied on by bank regulators in measuring the capital
position are the Tier I capital, total risk-based capital and leverage ratios.
Tier I capital consists of common and qualifying preferred stockholders' equity
less goodwill. Total capital consists of Tier I capital, qualifying subordinated
debt and a portion of the allowance for loan losses. Risk-based capital ratios
are calculated with reference to risk weighted assets. The Company's Tier I
capital ratio was 15.30% at December 31, 1998, compared to 15.40% at December
31, 1997. The total capital ratio was 16.20% at December 31, 1998, compared to
16.24% at December 31, 1997. These ratios are in excess of the mandated minimum
requirements of 4% and 8%, respectively. As of December 31, 1998, the Company
met all regulatory capital ratio requirements and was considered "well
capitalized" in accordance with FDICIA.
Stockholders' equity reached $15,142 at December 31, 1998 compared to $14,042 at
December 31, 1997. The leverage ratio consists of Tier I capital divided by
quarterly average assets. At December 31, 1998, the Company's leverage ratio was
10.66% compared to 10.65% at December 31, 1997. Each of these exceeds the
required minimum leverage ratio of 3%. The dividend payout ratio was 33.18% and
28.03% in 1998 and
19
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
1997, respectively. During 1998, the Company paid dividends
of $0.70 per share, up 4.48% from $0.67 per share paid in 1997.
Year 2000
The Company is cognizant of the risks posed by the Year 2000 (Y2K) issue for
both our operation and our borrowers. The Company continues to place high
priority regarding our Y2K efforts to identify any potential problems and
determine corrective action. Our Y2K committee, which has representation from
all areas of the Bank, including senior management and internal audit, continues
to meet at least monthly to monitor servicers and business partners in their
efforts to be Y2K prepared as well as complete our internal testing and
remediation projects. Inventory and assessment of all Y2K related items was
completed in April 1998.
The Company neither develops nor supports code for any information systems;
therefore, our remediation efforts have been toward soliciting compliance from
our vendors, business partners and servicers and on-site testing. The Company
has identified all core and business critical applications and the hardware
utilized for each. Our environmental systems such as HVAC and security systems
have been noted. Y2K compliance from the vendors for these areas has been
sought, and the Company notes that these applications are currently compliant or
the vendor has submitted an acceptable timeline for compliance. The Company is
monitoring the compliance efforts of such vendors and notes that in all cases,
time lines are being substantially adhered to.
A written testing strategy was developed and internal mission critical testing
is now completed without a single testing failure. Internal testing included,
but was not limited to, the century rollover date on all hardware and software
components followed by a complete update of core financial programs. Six other
critical dates were tested utilizing unit tests, as well as integrated tests,
where appropriate. Testing with third-party servicers has begun and is on target
to be completed by March 1999. The Federal Reserve Bank of Richmond has provided
comprehensive testing opportunities for our on-line connection. The Company has
completed Y2K testing for each of the applications in use with the Federal
Reserve. Third-party testing included data exchange where appropriate. All
testing is documented and reviewed for acceptance by our internal audit
department. In addition, documentation of the acceptance process will be made
available for review by our federal regulators. The Company continues to be
vigilant regarding any new Information Technology (IT) products and applications
and performs appropriate testing.
The Company has identified credit risks associated with borrowers who may not be
Y2K prepared through inquiry and completion of a readiness questionnaire. A
bankwide credit risk assessment was completed and submitted to the Board of
Directors. All new commercial credits continue to be evaluated for Y2K risk. Our
lending area is currently reevaluating any credit risk originally designated
with medium risk or higher to determine their current Y2K status. The Company
expects that virtually all of our borrowers will be low risk by the end of first
quarter 1999. However, methods to reduce risk for the Company, if lack of
compliance threatens to impact the viability of our customers, have been
established. Methods to reduce risk would be to require additional collateral,
require additional cosigners, or call the note.
20
<PAGE>
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years Ended December 31, 1998 and 1997
(In thousands, except ratios, share and per share data)
With testing substantially completed, the Company is focusing primarily on the
validation of the contingency plans developed to ensure business continuity
throughout potential disruptions possible in the century change. A separate
contingency task force has been established to direct the implementation and
training necessary for a successful plan. This plan would enable the Company to
continue to operate in the event of disruption of service from outside partners.
Although contingency plans address a number of scenarios, the Company does not
believe it is possible for any business to address the potentially unlimited
number of scenarios related to Y2K issues. Management does not believe in the
most likely worse case scenarios, Y2K will have a material effect on the
Company's results of operations, liquidity or financial condition. Although
considered highly unlikely, management realizes that if its Y2K assessment,
remediation or contingency plans prove to be inadequate, it could have a
material adverse effect on the Company's results of operations, liquidity or
financial condition.
The Company notes that the resources to address Y2K issues have been included in
the budget approved by the Board of Directors. As of December 31, 1998, actual
expenditures were $5. The estimated 1999 Y2K budget is $15.
The Company has confidence in our preparedness for the millennium change and in
our ability to continue to successfully operate and handle the transactions of
our customers.
21
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets 1998 1997
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks (note 2) $ 3,323 3,304
Federal funds sold 7,359 3,387
----------------- -----------------
Total cash and cash equivalents 10,682 6,691
Securities (note 3):
Available-for-sale, at fair value 20,352 22,039
Held-to-maturity, at amortized cost (fair value of $15,084 in 1998
and $10,898 in 1997) 14,720 10,701
Federal Reserve Bank stock, at cost 75 75
Federal Home Loan Bank Stock, at cost 409 409
Loans, net (notes 4, 9 and 10) 90,532 86,816
Premises and equipment, net (note 5) 3,547 3,158
Other real estate owned 48 151
Accrued income receivable 1,112 1,045
Other assets (note 8) 981 565
----------------- -----------------
Total assets $ 142,458 131,650
================= =================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6):
Demand 10,993 9,524
Savings and NOW accounts 39,575 37,104
Time 74,619 68,905
----------------- -----------------
Total deposits 125,187 115,533
Note payable to Federal Home Loan Bank 900 1,000
Accrued interest payable 587 534
Other liabilities (note 7) 642 541
----------------- -----------------
Total liabilities 127,316 117,608
----------------- -----------------
Stockholders' equity (notes 1 and 11):
Common stock, $3 par value. Authorized 3,000,000 shares, issued
and outstanding 719,025 shares in 1998 and 1997 2,157 2,157
Capital surplus 338 338
Retained earnings 12,424 11,409
Accumulated other comprehensive income 223 138
----------------- -----------------
Total stockholders' equity 15,142 14,042
Commitments, contingencies and other matters (notes 7, 9, 10 and 11)
----------------- -----------------
Total liabilities and stockholders' equity $ 142,458 131,650
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 8,011 7,838
Interest on securities:
U.S. Treasury 229 256
U.S. Government agencies 963 1,140
Corporate 214 165
States and political subdivisions (tax exempt) 566 518
Other 93 73
Interest on federal funds sold 395 134
----------------- -----------------
Total interest income 10,471 10,124
----------------- -----------------
Interest expense:
Interest on deposits:
Savings and NOW accounts 1,137 1,123
Time - other 3,398 3,184
Time - $100,000 and over 667 582
Other interest expense 59 7
----------------- -----------------
Total interest expense 5,261 4,896
----------------- -----------------
Net interest income 5,210 5,228
Provision for loan losses (note 4) 300 350
----------------- -----------------
Net interest income after provision for loan losses 4,910 4,878
----------------- -----------------
Noninterest income:
Service charges on deposit accounts 263 268
Net gain on calls and sales of securities (note 3) 10 4
Other operating income 240 134
----------------- -----------------
Total noninterest income 513 406
----------------- -----------------
Noninterest expense:
Salaries and employee benefits (note 7) 1,847 1,650
Occupancy expense 167 98
Furniture and equipment 316 330
Other operating expenses 1,028 827
----------------- -----------------
Total noninterest expense 3,358 2,905
----------------- -----------------
Income before income tax expense 2,065 2,379
Income tax expense (note 8) 548 662
----------------- -----------------
Net income 1,517 1,717
Other comprehensive income, net of income tax expense:
Net unrealized gains on securities available for sale 85 150
----------------- -----------------
Comprehensive income $ 1,602 1,867
================= =================
Basic net income per share $ 2.11 2.39
================= =================
Diluted net income per share $ 2.09 2.39
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998 and 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
--------------------------------- Capital Retained Comprehensive
Shares Par Value Surplus Earnings Income Total
------------------ ------------ ---------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 719,025 $ 2,157 338 10,174 (12) 12,657
Net income -- -- -- 1,717 -- 1,717
Cash dividends declared
by Bankshares ($.67 per share) -- -- -- (482) -- (482)
Change in net unrealized gains on
available-for-sale securities,
net of deferred income tax
expense of $77 -- -- -- -- 150 150
------------------ ------------ ---------- ------------ --------------- ------------
Balances, December 31, 1997 719,025 2,157 338 11,409 138 14,042
Net income -- -- -- 1,517 -- 1,517
Cash dividends declared by
Bankshares ($.70 per share) -- -- -- (502) -- (502)
Change in net unrealized gains on
available-for-sale securities,
net of deferred income tax
expense of $44 -- -- -- -- 85 85
================== ============ ========== ============ =============== ============
Balances, December 31, 1998 719,025 $ 2,157 338 12,424 223 15,142
================== ============ ========== ============ =============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,517 1,717
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of bank premises and equipment 240 213
Amortization of organization costs 28 4
Amortization of core deposit premium 13 16
Amortization of unearned fees, net (133) (102)
Net amortization of premiums and discounts on
securities 29 8
Provision for loan losses 300 350
Provision for deferred income taxes (166) 74
Net gain on calls and sales of securities (10) (4)
Net gain on sale of premises and equipment (10) --
Net (increase) decrease in:
Accrued income receivable (67) 21
Other assets (147) 121
Net increase (decrease) in:
Accrued interest payable 53 (3)
Other liabilities 101 (12)
----------------- ------------------
Net cash provided by operating activities 1,748 2,403
----------------- ------------------
Cash flows from investing activities:
Purchases of held-to-maturity securities (5,598) (675)
Purchases of available-for-sale securities (9,817) (471)
Proceeds from maturities and calls of held-to-maturity securities 1,568 1,874
Proceeds from paydowns and maturities of held-to-maturity
mortgage-backed securities 4 5
Proceeds from maturities and calls of available-for-sale securities 9,617 1,720
Proceeds from paydowns and maturities of available-for-sale
mortgage-backed securities 2,003 796
Purchase of Federal Home Loan Bank stock -- (6)
Net increase in loans (4,203) (7,576)
Recoveries on loans charged off 133 180
Purchases of premises and equipment (1,380) (2,155)
Proceeds from sale of bank premises and equipment 761 --
Proceeds from sale and rental of other real estate owned 103 5
----------------- ------------------
Net cash used in investing activities (6,809) (6,303)
----------------- ------------------
</TABLE>
25
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand, savings and NOW deposits $ 3,940 476
Net increase in time deposits 5,714 3,853
Proceeds from (repayments of) note payable to Federal
Home Loan Bank (100) 1,000
Dividends paid (502) (482)
------------------ -----------------
Net cash provided by financing activities 9,052 4,847
------------------ -----------------
Net increase in cash and cash equivalents 3,991 947
Cash and cash equivalents, beginning of year 6,691 5,744
------------------ -----------------
Cash and cash equivalents, end of year $ 10,682 6,691
================== =================
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Income taxes $ 719 629
================== =================
Interest $ 5,250 4,899
================== =================
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to repossessed properties $ 187 174
================== =================
Loans charged against the allowance for loan
losses $ 303 457
================== =================
Unrealized gains (losses) on available-for-sale
securities $ 129 227
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Pinnacle Bankshares Corporation
(Bankshares) and its wholly-owned subsidiary, The First National Bank of
Altavista (the "Bank") (collectively, the "Company"), conform to
generally accepted accounting principles and general practices within the
banking industry.
Bankshares, a Virginia Corporation, was incorporated under the laws of
the Commonwealth of Virginia on January 22, 1997, primarily to serve as a
holding company for the Bank. Effective on May 1, 1997, the Bank became a
wholly-owned subsidiary of Bankshares. Pursuant to this reorganization,
Bankshares issued 719,025 shares of its common stock, $3.00 par value in
exchange for 239,675 shares of the Bank's common stock, $2.00 par value.
The reorganization has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for the periods prior
to May 1, 1997 include the accounts and results of operations of the
Bank. All shares and per share data have been adjusted to reflect the
exchange of Bankshares' shares for Bank shares.
The following is a summary of the more significant accounting policies:
(a) Consolidation
The consolidated financial statements include the accounts of
Pinnacle Bankshares Corporation and its wholly-owned subsidiary.
All material intercompany balances and transactions have been
eliminated.
(b) Securities
The Bank classifies its securities in three categories: (1) debt
securities that the Bank has the positive intent and ability to
hold to maturity are classified as "held-to-maturity securities"
and reported at amortized cost; (2) debt and equity securities
that are bought and held principally for the purpose of selling
them in the near term are classified as "trading securities" and
reported at fair value, with unrealized gains and losses included
in net income; and (3) debt and equity securities not classified
as either held-to-maturity securities or trading securities are
classified as "available-for-sale securities" and reported at fair
value, with unrealized gains and losses excluded from net income
and reported in a separate component of stockholders' equity.
Held-to-maturity securities are stated at cost, adjusted for
amortization of premiums and accretion of discounts on a basis
which approximates the level yield method. The Bank does not
maintain trading account securities. Gains or losses on
disposition are based on the net proceeds and adjusted carrying
values of the securities called or sold, using the specific
identification method. A decline in the market value of any
available-for-sale or held-to-maturity security below cost that is
deemed other than temporary is charged to net income, resulting in
the establishment of a new cost basis for the security.
(Continued)
27
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
(c) Required Investments
As members of the Federal Reserve and the Federal Home Loan Bank
(FHLB) of Atlanta, the Bank is required to maintain certain
minimum investments in the common stock of those entities.
Required levels of investment are based upon the Bank's capital
and a percentage of qualifying assets. In addition, the Bank is
eligible to borrow from the FHLB with borrowings collateralized by
qualifying assets, primarily residential mortgage loans, and the
Bank's capital stock investment in the FHLB. At December 31, 1998,
the Bank's available borrowing limit was approximately $20,500.
The Bank had $900 and $1,000 in borrowings outstanding at December
31, 1998 and 1977, respectively. The note payable is due in
December 2002 and bears interest at a fixed rate of 6.13 percent.
(d) Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by
unearned income and fees on loans, and an allowance for loan
losses. Income is recognized over the terms of the loans using
methods which approximate the level yield method. The allowance
for loan losses is a valuation allowance consisting of the
cumulative effect of the provision for loan losses, plus any
amounts recovered on loans previously charged off, minus loans
charged off. The provision for loan losses charged to operating
expenses is the amount necessary in management's judgment to
maintain the allowance for loan losses at a level it believes
sufficient to cover losses in the collection of its loans.
Management determines the adequacy of the allowance based upon
reviews of individual credits, recent loss experience,
delinquencies, current economic conditions, the risk
characteristics of the various categories of loans and other
pertinent factors. Loans are charged against the allowance for
loan losses when management believes the collectibility of the
principal is unlikely. While management uses available information
to recognize losses on loans, future additions to the allowance
for loan losses may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require
the Bank to recognize additions to the allowance for loan losses
based on their judgments about information available to them at
the time of their examinations.
Interest related to nonaccrual loans is recognized on the cash
basis. Loans are generally placed in nonaccrual status when the
collection of principal and interest is 90 days or more past due,
unless the obligation is both well-secured and in the process of
collection.
Impaired loans are required to be presented in the financial
statements at the present value of the expected future cash flows
or at the fair value of the loan's collateral. Homogeneous loans
such as real estate mortgage loans, individual consumer loans,
home equity loans and bankcard loans are evaluated collectively
for impairment. Management, considering current information and
events regarding the borrowers ability to repay their obligations,
considers a loan to be impaired when it is probable that the Bank
will be unable to collect all amounts due according to the
(Continued)
28
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
contractual terms of the loan agreement. Impairment losses are
included in the allowance for loan losses through a charge to the
provision for loan losses. Cash receipts on impaired loans
receivable are applied first to reduce interest on such loans to
the extent of interest contractually due and any remaining amounts
are applied to principal.
(e) Loan Origination and Commitment Fees and Certain Related Direct
Costs
Loan origination and commitment fees and certain direct loan
origination costs charged by the Bank are deferred and the net
amount amortized as an adjustment of the related loan's yield. The
Bank is amortizing these net amounts over the contractual life of
the related loans or, in the case of demand loans, over the
estimated life. Net fees related to standby letters of credit are
recognized over the commitment period.
(f) Bank Premises and Equipment
Bank premises and equipment are stated at cost, net of accumulated
depreciation. Depreciation on buildings and equipment is computed
by the straight-line and declining-balance methods over the
estimated useful lives of the assets. The cost of assets retired
and sold and the related accumulated depreciation are eliminated
from the accounts and the resulting gains or losses are included
in determining net income. Expenditures for maintenance and
repairs are charged to expense as incurred, and improvements and
betterments are capitalized.
(g) Other Real Estate Owned
Other real estate owned consists of properties acquired through
foreclosure or deed in lieu of foreclosure. These properties are
carried at the lower of cost or fair value less estimated selling
costs. Losses from the acquisition of property in full or partial
satisfaction of debt are charged against the allowance for loan
losses. Subsequent write-downs, if any, are charged to expense.
Gains and losses on the sales of other real estate owned are
recorded in net income in the year of the sale.
(h) Pension Plan
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosure about Pension
and Other Post-retirement Benefits. Statement 132 revises the
Company's disclosure about pension and other post-retirement
benefit plans. Statement 132 does not change the method of
accounting for such plans.
(Continued)
29
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
The Bank maintains a noncontributory defined benefit pension plan
which covers substantially all of its employees. The net periodic
pension expense includes a service cost component, interest on the
projected benefit obligation, a component reflecting the actual
return on plan assets, the effect of deferring and amortizing
certain actuarial gains and losses, and the amortization of any
unrecognized net transition obligation on a straight-line basis
over the average remaining service period of employees expected to
receive benefits under the plan. The Bank's funding policy is to
make annual contributions in amounts necessary to satisfy the
Internal Revenue Service's funding standards and to the extent
that they are tax deductible.
(i) Income Taxes
Income taxes are accounted for under the asset and liability
method, whereby deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in net income in the period that includes the enactment
date.
(j) Stock Options
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
(k) Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share. Statement 128 established standards for computing and
presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. It replaces
the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a
(Continued)
30
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity.
The provisions of Statement 128 were adopted by the Company at
December 31, 1997. The Statement requires restatement of all prior
years' EPS data previously presented. The following is a
reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the periods indicated:
<TABLE>
<CAPTION>
Net Income Shares Per Share
Year Ended December 31, 1998 (Numerator) (Denominator) Amount
- ----------------------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C>
Basic net income per share $ 1,517 719,025 $ 2.11
=================
Effect of dilutive stock options -- 5,260
----------------- ------------------
Diluted net income per share $ 1,517 724,285 $ 2.09
================= ================== =================
Year Ended December 31, 1997
- -----------------------------------
Basic net income per share 1,717 719,025 $ 2.39
=================
Effect of dilutive stock options -- 553
----------------- ------------------
Diluted net income per share $ 1,717 719,578 $ 2.39
================= ================== =================
</TABLE>
(l) Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash
and cash equivalents include cash on hand, amounts due from banks
(with original maturities of three months or less), and federal
funds sold. Generally, federal funds are purchased and sold for
one-day periods.
(m) Use of Estimates
(Continued)
31
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the
consolidated balance sheets and revenues and expenses for the
years ended December 31, 1998 and 1997. Actual results could
differ from those estimates.
(n) Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
The Company adopted the provisions of Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, on January 1, 1997. The Statement
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This Statement also provides implementation guidance
for assessing isolation of transferred assets and for accounting
for transfers of partial interests, servicing of financial assets,
securitizations, transfers of sales-type and direct financing
lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls," "wash sales," loan
syndications and participations, risk participations in banker's
acceptances, factoring arrangements, transfers of receivables with
recourse, and extinguishments of liabilities. Statement No. 127,
Deferral of the Effective Date of Certain Provisions of Statement
No. 125, issued in December 1996, deferred until January 1, 1998,
the effective date of paragraph 15 of Statement 125 and
implementation of Statement 125 for repurchase agreement,
dollar-roll, securities lending and similar transactions as
defined in Statement 125. Statement 125 was required to be adopted
on a prospective basis; adoption did not have a material impact on
the Company's financial position, results of operations or
liquidity.
(o) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income.
Statement 130 establishes standards for reporting and presentation
of comprehensive income and its components in a full set of
general purpose financial statements. Statement 130 was issued to
address concerns over the practice of reporting elements of
comprehensive income directly in equity.
The Company is required to classify items of "Other Comprehensive
Income" (such as net unrealized gains (losses) on securities
available-for-sale) by their nature in a financial statement
(Continued)
32
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
and present the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital
in the equity section of a statement of financial position. It
does not require per share amounts of comprehensive income to be
disclosed.
In accordance with the provisions of the Statement, the Company
has included Consolidated Statements of Income and Comprehensive
Income in the accompanying consolidated financial statements.
Comprehensive income consists of net income and net unrealized
gains (losses) on securities available-for-sale. Also, accumulated
other comprehensive income is included as a separate disclosure
within the Consolidated Statements of Changes in Stockholders'
Equity in the accompanying consolidated financial statements.
Comprehensive income for the year ended December 31, 1997 is
presented for comparative purposes. The adoption of Statement 130
did not have any effect on the Company's consolidated financial
position, results of operation or liquidity.
(p) Reclassifications
Certain reclassifications were made to prior year amounts to
conform with 1998 presentation.
(2) Restrictions on Cash
To comply with Federal Reserve regulations, the Bank is required to
maintain certain average reserve balances. The daily average reserve
requirements were approximately $661 and $540 for the weeks including
December 31, 1998 and 1997, respectively.
(3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities at December 31, 1998 and 1997 are as follows:
(Continued)
33
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Costs Gains Losses Values
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies $ 10,996 138 (7) 11,127
Obligations of states and political subdivisions 4,199 144 -- 4,343
Mortgage-backed securities - Government 4,208 61 (2) 4,267
Corporate securities 504 4 -- 508
Other securities 107 -- -- 107
------------- ------------- ------------- -------------
Totals $ 20,014 347 (9) 20,352
============= ============= ============= =============
1998
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-Maturity Costs Gains Losses Values
------------- ------------- ------------- -------------
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies 2,411 16 -- 2,427
Obligations of states and political subdivisions 12,302 360 (12) 12,650
Mortgage-backed securities - private 7 -- -- 7
------------- ------------- ------------- -------------
Totals $ 14,720 376 (12) 15,084
============= ============= ============= =============
1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Costs Gains Losses Values
------------- ------------- ------------- -------------
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies 10,844 52 (16) 10,880
Obligations of states and political subdivisions 3,891 122 (1) 4,012
Mortgage-backed securities - Government 6,223 60 (25) 6,258
Corporate securities 764 18 -- 782
Other securities 107 -- -- 107
------------- ------------- ------------- -------------
Totals $ 21,829 252 (42) 22,039
============= ============= ============= =============
</TABLE>
(Continued)
34
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-Maturity Costs Gains Losses Values
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 3,142 17 (4) 3,155
Obligations of states and political
subdivisions 7,548 192 (8) 7,732
Mortgage-backed securities - private 11 -- -- 11
============= ============= ============= =============
Totals $ 10,701 209 (12) 10,898
============= ============= ============= =============
</TABLE>
The amortized costs and fair values of available-for-sale and
held-to-maturity securities at December 31, 1998, by contractual
maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
Available-for-Sale Held-to-Maturity
----------------------------- -----------------------------
Amortized Fair Amortized Fair
Costs Values Costs Values
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 769 775 2,198 2,213
Due after one year through five years 6,778 6,867 2,730 2,810
Due after five years through ten years 7,430 7,580 7,432 7,609
Due after ten years 829 863 2,353 2,445
------------- ------------- ------------- -------------
15,806 16,085 14,713 15,077
Mortgage-backed securities 4,208 4,267 7 7
-------------- -------------- -------------- -------------
Totals $ 20,014 20,352 14,720 15,084
============== ============== ============== =============
</TABLE>
No securities were sold in 1998 or 1997. Gross gains of $10 and $4 were
realized in 1998 and 1997, respectively, on calls of securities.
Securities with amortized costs of approximately $2,100 and $3,950 (fair
values of $2,156 and $3,989, respectively) as of December 31, 1998 and
1997, respectively, were pledged as collateral for public deposits.
(4) Loans
(Continued)
35
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
A summary of loans at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Real estate loans:
Residential $ 34,324 37,557
Other 11,307 8,912
Loans to individuals for household, family and other
consumer expenditures 32,817 31,942
Commercial and industrial loans 12,890 8,714
All other loans 367 840
----------------- -----------------
Total loans, gross 91,705 87,965
Less unearned income and fees (296) (402)
----------------- -----------------
Loans, net of unearned income and fees 91,409 87,563
Less allowance for loan losses (877) (747)
================= =================
Loans, net $ 90,532 86,816
================= =================
</TABLE>
Nonaccrual loans amounted to approximately $45 and $38 at December 31,
1998 and 1997, respectively. Interest income that would have been earned
on nonaccrual loans if they had been current in accordance with their
original terms and the recorded interest that was included in income on
these loans was not significant for 1998 and 1997. There were no
commitments to lend additional funds to customers whose loans were on
nonaccrual at December 31, 1998.
In the normal course of business, the Bank has made loans to executive
officers and directors. At December 31, 1998, loans to executive officers
and directors were approximately $785 compared to $1,096 at December 31,
1997. During 1998, new loans to executive officers and directors amounted
to approximately $723 and repayments amounted to approximately $1,034.
Loans to companies in which executive officers and directors have an
interest amounted to approximately $1,316 and $1,297 at December 31, 1998
and 1997, respectively. In addition, dealer loans purchased from
companies owned by certain directors, and against whom the bank has
recourse, amounted to approximately $174 and $261 at December 31, 1998
and 1997, respectively.
Activity in the allowance for loan losses is summarized as follows:
(Continued)
36
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Balances, beginning of year $ 747 674
Provision for loan losses 300 350
Loans charged off (303) (457)
Loan recoveries 133 180
----------------- -----------------
Balances, end of year $ 877 747
================= =================
</TABLE>
At December 31, 1998 and 1997, the recorded investment in loans for which
an impairment has been identified totaled approximately $216 and $96,
respectively. The entire amounts of impaired loans of $216 and $96
related to loans with corresponding valuation allowances of approximately
$91 and $13 at December 31, 1998 and 1997, respectively. The average
recorded investment in impaired loans receivable during 1998 and 1997 was
approximately $152 and $120. Interest income recognized on impaired loans
during 1998 and 1997 was $25 and $5, including approximately $9 and $-0-,
respectively, recognized on a cash basis.
(5) Premises and Equipment
Premises and equipment were comprised of the following as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Land improvements $ 367 169
Buildings 2,528 1,056
Equipment, furniture and fixtures 2,417 1,894
----------------- -----------------
5,312 3,119
Less accumulated depreciation (2,643) (2,417)
----------------- -----------------
2,669 702
Land 832 1,139
Construction-in-progress 46 1,317
----------------- -----------------
$ 3,547 3,158
================= =================
</TABLE>
(6) Deposits
A summary of deposits at December 31, 1998 and 1997 follows:
(Continued)
37
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Noninterest bearing:
Demand deposits $ 10,993 9,524
Interest bearing:
Savings 22,675 23,700
NOW accounts 16,900 13,404
Time deposits 62,535 57,080
Time deposits greater than $100,000 12,084 11,825
----------------- -----------------
$ 125,187 115,533
================= =================
</TABLE>
At December 31, 1998, the scheduled maturity of time deposits are as
follows: $52,786 in 1999; $13,114 in 2000; $2,395 in 2001; $1,761 in
2002 and $4,563 in 2003.
(7) Employee Benefit Plans
The Bank maintains a noncontributory defined benefit pension plan which
covers substantially all of its employees. Benefits are computed based on
employees' average final compensation and years of credited service.
Pension expense amounted to approximately $108 and $82 in 1998 and 1997,
respectively.
The funded status of the pension plan at September 30, 1998 and 1997
(most recent information available) and pertinent assumptions are as
follows:
<TABLE>
<CAPTION>
Pension Benefits
December 31,
-------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,659 1,259
Service cost 114 97
Interest cost 124 94
Actuarial gain 28 255
Benefits paid (5) (46)
----------------- -----------------
Benefit obligation at end of year 1,920 1,659
----------------- -----------------
</TABLE>
(Continued)
38
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Pension Benefits
-------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Change in Plan Assets
Fair value of plan assets at beginning of year $ 1,456 1,144
Actual return on plan assets (9) 242
Employer contribution -- 116
Benefits paid (5) (46)
----------------- -----------------
Fair value of plan assets at end of year 1,442 1,456
----------------- -----------------
Funded status (478) (203)
Unrecognized net actuarial gain (139) (315)
Unrecognized prior service cost 107 116
----------------- -----------------
Accrued pension benefit cost, included
in other liabilities $ (510) (402)
================= =================
Weighted Average Assumptions as of December 31
1998 1998
----------------- -----------------
Weighted average discount rate 7.50% 7.50%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.00% 5.00%
</TABLE>
The components of net periodic pension benefit cost under the plan is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Service cost $ 114 97
Interest cost 124 94
Expected return on plan assets (131) (103)
Net amortization (accretion) 1 (6)
----------------- -----------------
Net pension cost $ 108 82
================= =================
</TABLE>
Plan assets consisted of cash equivalents, U.S. Government securities,
mortgage-backed securities, corporate bonds and equities securities in a
pooled pension fund administered by the Virginia Bankers Association. The
Company also has a 401(k) plan for which the Company does not currently
match employee contributions to the plan.
(Continued)
39
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
(8) Income Taxes
Total income taxes for the years ended December 31, 1998 and 1997 are
allocated as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Income $ 548 662
Stockholders' equity for unrealized gains
(losses) on available-for-sale securities
recognized for financial reporting purposes 44 77
----------------- -----------------
Total $ 592 739
================= =================
</TABLE>
Income tax expense (benefit) attributable to income before income tax
expense is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Current $ 714 588
Deferred (166) 74
----------------- -----------------
Total $ 548 662
================= =================
</TABLE>
Included in income tax expense were tax expenses of approximately $3 and
$1 for the years ended December 31, 1998 and 1997, respectively, related
to net realized gains and losses on the calls of securities.
Income tax expense for the years ended December 31, 1998 and 1997
differed from the amounts computed by applying the U.S. Federal income
tax rate of 34 percent to income before income tax expense as a result of
the following:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Computed "expected" income tax expense $ 702 809
Increase (reduction) in income tax expense
resulting from:
Tax-exempt interest (195) (176)
Disallowance of interest expense 31 26
Other 10 3
----------------- -----------------
Total $ 548 662
================= =================
</TABLE>
(Continued)
40
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 202 158
Accrued pension, due to accrual for financial
reporting purposes in excess of actual pension
contributions 173 137
Loans, due to unearned fees, net 87 --
Other 27 27
----------------- -----------------
Total gross deferred tax assets 489 322
Less valuation allowance -- --
----------------- -----------------
Net deferred tax assets 489 322
----------------- -----------------
Deferred tax liabilities:
Bank premises and equipment, due to differences
in depreciation 41 40
Prepaid expenses, due to capitalization for
financial reporting purposes 2 2
Net unrealized gains on available-for-sale securities 115 71
----------------- -----------------
Total gross deferred tax liabilities 158 113
----------------- -----------------
Net deferred tax asset, included in other
assets $ 331 209
================= =================
</TABLE>
The Bank has determined that a valuation allowance for the gross deferred
tax assets is not necessary at December 31, 1998 and 1997, since
realization of the entire gross deferred tax assets can be supported by
the amounts of taxes paid during the carryback periods available under
current tax laws.
(9) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments may involve, to
varying degrees, credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
(Continued)
41
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
Credit risk is defined as the possibility of sustaining a loss because
the other parties to a financial instrument fail to perform in accordance
with the terms of the contract. The Bank's maximum exposure to credit
loss under commitments to extend credit and standby letters of credit is
represented by the contractual amount of these instruments. The Bank uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
The Bank requires collateral to support financial instruments when it is
deemed necessary. The Bank evaluates such customers' creditworthiness on
a case-by-case basis. The amount of collateral obtained upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral may include deposits held in financial institutions, U.S.
Treasury securities, other marketable securities, real estate, accounts
receivable, inventory, and property, plant and equipment.
Financial instruments whose contract amounts represent credit risk:
Contract Amounts at
December 31,
----------------------------------
1998 1997
----------------- --------------
Commitments to extend credit $ 11,661 9,015
================= ==============
Standby letters of credit $ 703 1,369
================= ==============
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements, including bond financing and similar transactions. Unless
renewed, substantially all of the Bank's credit commitments at December
31, 1998 will expire within one year. Management does not anticipate any
material losses as a result of these transactions. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers.
(10) Concentrations of Credit Risk
(Continued)
42
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
The Bank grants commercial, residential, consumer and agribusiness loans
to customers in the central Virginia area. The Bank has a diversified
loan portfolio which is not dependent upon any particular economic
sector. As a whole, the portfolio could be affected by general economic
conditions in the central Virginia region.
The Bank's commercial loan portfolio is diversified, with no significant
concentrations of credit. The real estate loan portfolio consists
principally of 1-4 family residential property. The installment loan
portfolio consists of consumer loans primarily for automobiles and other
personal property. Overall, the Bank's loan portfolio is not concentrated
within a single industry or group of industries, the loss of any one or
more of which would generate a materially adverse impact on the business
of the Bank.
The Bank has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and
personal property are generally collateralized by the related property.
Credit approval is principally a function of collateral and the
evaluation of the creditworthiness of the borrower based on available
financial information.
(11) Dividend Restrictions and Capital Requirements
Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary Bank. For the years ended December 31, 1998
and 1997, dividends from the subsidiary Bank totaled $538 and $522,
respectively.
Substantially all of Bankshares' retained earnings consists of
undistributed earnings of its subsidiary Bank, which are restricted by
various regulations administered by federal banking regulatory agencies.
Under applicable federal laws, the Comptroller of the Currency restricts,
without prior approval, the total dividend payments of the Bank in any
calendar year to the net profits of that year, as defined, combined with
the retained net profits for the two preceding years. At December 31,
1998, retained net profits of the Bank which were free of such
restriction approximated $2,174.
Bankshares and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on Bankshares'
consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, Bankshares and the
Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. Bankshares and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require Bankshares and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital
(Continued)
43
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
(as defined in the regulations) to risk-weighted assets (as defined), and
of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that Bankshares and the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from Office of the
Comptroller of the Currency categorized Bankshares and the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, Bankshares and the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or events
since that notification that management believes have changed Bankshares
and the Bank's category.
Bankshares and the Bank's actual capital amounts and ratios are presented
in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets):
Bankshares consolidated $ 15,715 16.20% $ 7,761 >8.0% $ N/A N/A
Bank 15,708 16.19% 7,761 >8.0% 9,701 >10.0%
Tier I Capital
(to Risk Weighted Assets):
Bankshares consolidated 14,838 15.30% 3,880 >4.0% N/A N/A
Bank 14,831 15.29% 3,880 >4.0% 5,821 >6.0%
Tier I Capital (Leverage)
(to Average Assets):
Bankshares consolidated 14,838 10.66% 5,569 >4.0% N/A N/A
Bank 14,831 10.65% 5,568 >4.0% 6,960 >5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets):
Bankshares consolidated $ 14,529 16.24% $ 7,159 >8.0% $ N/A N/A
Bank 14,535 16.24% 7,159 >8.0% 8,949 >10.0%
Tier I Capital
(to Risk Weighted Assets):
Bankshares consolidated 13,782 15.40% 3,580 >4.0% N/A N/A
Bank 13,788 15.41% 3,580 >4.0% 5,369 >6.0%
Tier I Capital (Leverage)
(to Average Assets):
Bankshares consolidated 13,782 10.65% 5,174 >4.0% N/A N/A
Bank 13,788 10.66% 5,174 >4.0% 6,468 >5.0%
</TABLE>
(12) Disclosures About Fair Value of Financial Instruments
(Continued)
44
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires the Company to disclose
estimated fair values of its financial instruments.
The following methods and assumptions were used to estimate the
approximate fair value of each class of financial instrument for which it
is practicable to estimate that value.
(a) Cash and Due from Banks and Federal Funds Sold
The carrying amounts are a reasonable estimate of fair value.
(b) Securities
The fair value of securities, except state and municipal
securities, is estimated based on bid prices published in
financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities
is not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market
prices of similar instruments, adjusted for differences between
the quoted instruments and the instruments being valued.
(c) Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, real estate - residential, real estate - other, loans
to individuals and other loans. Each loan category is further
segmented into fixed and adjustable rate interest terms.
The fair value of loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk
inherent in the loan as well as estimates for prepayments. The
estimate of maturity is based on the Company's historical
experience with repayments for each loan classification, modified,
as required, by an estimate of the effect of current economic and
lending conditions.
(d) Deposits and Note Payable to Federal Home Loan Bank
The fair value of demand deposits, NOW accounts, savings deposits
and the note payable to the Federal Home Loan Bank is the amount
payable on demand. The fair value of fixed maturity time deposits,
certificates of deposit and the note payable to the Federal Home
Loan Bank is estimated using the rates currently offered for
deposits or borrowings of similar remaining maturities.
(e) Commitments to Extend Credit and Standby Letters of Credit
(Continued)
45
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
The only amounts recorded for commitments to extend credit and
standby letters of credit are the deferred fees arising from these
unrecognized financial instruments. These deferred fees are not
deemed significant at December 31, 1998 and 1997, and as such, the
related fair values have not been estimated.
The carrying amounts and approximate fair values of the Company's
financial instruments are as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------------------------- -------------------------------
Carrying Approximate Carrying Approximate
Amounts Fair Values Amounts Fair Values
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 3,323 3,323 3,304 3,304
Federal funds sold 7,359 7,359 3,387 3,387
Securities:
Available-for-sale 20,352 20,352 22,039 22,039
Held-to-maturity 14,720 15,084 10,701 10,898
Federal Reserve Bank Stock 75 75 75 75
Federal Home Loan Bank Stock 409 409 409 409
Loans, net of unearned income and fees 91,409 93,000 87,563 87,828
--------------- -------------- -------------- --------------
Total financial assets $ 137,647 139,602 127,478 127,940
=============== ============== ============== ==============
Financial liabilities:
Deposits 125,187 126,019 115,533 116,165
Notes payable to Federal Home Loan
Bank 900 903 1,000 1,000
--------------- -------------- -------------- --------------
Total financial liabilities $ 126,087 126,922 116,533 117,165
=============== ============== ============== ==============
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets that are not
considered financial assets include deferred tax assets and premises and
equipment and other real estate owned. In addition, the
(Continued)
46
<PAGE>
PINNACLE BANKSHARES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(In thousands, except share and per share data)
tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in the estimates.
(13) Parent Company Financial Information
Condensed financial information of Pinnacle Bankshares Corporation
(Parent) is presented below:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Assets
Investment in subsidiaries, at equity $ 15,135 14,020
Other assets 19 36
----------------- -----------------
Total assets $ 15,154 14,056
================= =================
Liabilities and Stockholders' Equity
Other liabilities 12 14
Stockholders' equity (notes 1 and 11):
Common stock of $3.00 par value. Authorized
3,000,000 shares; issued and outstanding 719,025
shares 2,157 2,157
Capital surplus 338 338
Retained earnings 12,424 11,409
Accumulated other comprehensive income 223 138
----------------- -----------------
Total stockholders' equity 15,142 14,042
Commitments, contingencies and other matters
(notes 7, 9, 10 and 11)
----------------- -----------------
Total liabilities and stockholders' equity $ 15,154 14,056
================= =================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB FOR THE PERIOD ENDING DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-KSB
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,323
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,359
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,352
<INVESTMENTS-CARRYING> 14,720
<INVESTMENTS-MARKET> 15,084
<LOANS> 90,532
<ALLOWANCE> 877
<TOTAL-ASSETS> 142,458
<DEPOSITS> 125,187
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,129
<LONG-TERM> 0
0
0
<COMMON> 2,157
<OTHER-SE> 12,985
<TOTAL-LIABILITIES-AND-EQUITY> 142,458
<INTEREST-LOAN> 8,011
<INTEREST-INVEST> 2,065
<INTEREST-OTHER> 395
<INTEREST-TOTAL> 10,471
<INTEREST-DEPOSIT> 5,202
<INTEREST-EXPENSE> 5,261
<INTEREST-INCOME-NET> 5,210
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 3,358
<INCOME-PRETAX> 2,065
<INCOME-PRE-EXTRAORDINARY> 2,065
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,517
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.09
<YIELD-ACTUAL> 4.20
<LOANS-NON> 45
<LOANS-PAST> 448
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 747
<CHARGE-OFFS> 303
<RECOVERIES> 133
<ALLOWANCE-CLOSE> 877
<ALLOWANCE-DOMESTIC> 877
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 434
</TABLE>
